Currently, Facebook is the hottest and most in demand IPO we have seen for some time. In my experience, the hotter and more “in demand” the investment opportunity, the more inclined we are to fall prey to some common investment mistakes. Why? Because one of the keys to not making mistakes is to pause, take a deep breath and then pause again! In other words, we need to be deliberate and thoughtful. But with hot stocks like Facebook, we tend to get excited and throw caution to wind and go with our gut. But our gut, of course, takes its cues from our brain.
Research in brain science has consistently confirmed that we are not wired to make good financial decisions. In Why We Make Mistakes, author Joseph Hallinan makes the point (as does mountains of other research) that if you make mistakes, or are prone to make certain mistakes, you are certifiably sane and completely normal. To me, that’s the good news/bad news conundrum when it comes to investing: If you are inclined to make mistakes, you are normal, but being normal can cost you dearly when investing and making other financial decisions.
If you are beginning to buck at the thought you are naturally inclined to make mistakes, you should know that this has nothing to do with intelligence. The basic conclusion of all the research that I have read is that regardless of your IQ, your natural instincts betray you when it comes to making sound financial decisions and being a successful long-term investor.
We must be vigilant in recognizing when our mistake-prone brains could push us to make a bad financial decision. A critical step in making good investment and financial decisions is to recognize our natural tendency to make mistakes. Admitting you have a problem is the first step towards recovery. Remember the adage: A problem well-defined is a problem half-solved!
Over several blog posts, I’ll cover some common financial mistakes, such as overconfidence, anchoring and mental shortcuts that can trigger bad investment decisions. So drop back by soon to learn how you can overcome your natural tendencies and make better financial decisions.